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w\ [COMMITTEE PRINT]
TAX REVISION ISSUES— 1976
Prepaeed FOR THE USE v <iili*,
COMMITTEE ON FIN^
BY THE STAFF OF THE
JOINT COMMITTEE OX INTERNAL REVENUE
APRIL 14, 197G
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1976
Introduction — __ V
1. Revision of tax tables for individuals.- 1
2. Alimony payments 2
3. Retirement income credit— 3
4. Credit for child care expenses 8
5. Sick pay and certain military, et cetera, disability pensions 11
6. Moving expenses 14
7. Accumulation trusts 17
Digitized by the Internet Archive
This pamphlet presents background information on a number of
proposals designed to simplify the income tax for individuals. The
proposals described here are contained in the House-passed bill (H.K.
10612). Many other tax simplification proposals could be considered.
Subsequent pamphlets will discuss other simplification proposals, al-
ternatives, and modifications to the proposals presented here.
The matters discussed here include the revision and expansion of
the tax tables to include many individuals now not eligible to use these
tables, a revision in the treatment of alimony payments, a simplific-a-
cation and expansion of the retirement income credit, a simplification
and modification of the child care provision in present law. a revision
of the sick pay deduction and an expansion of the moving expense de-
duction. While simplification is the primary concern in most of these
items, to some extent the changes made by the House were also de-
signed to deal with what the House considered problems of tax equity.
In each of these areas, the pamphlet describes the present law and
the issues that have been presented. The House provisions are also de-
1. Revision of Tax Tables for Individuals
Under present law, a taxpayer whose adjusted gross income (AGI)
is under $10,000 ($15,000 for 1975 only) and who takes the standard
deduction is required to use the optional tax tables. These tables have
AGI brackets as horizontal row designations ; marital status and num-
ber of exemptions as vertical column headings; and the amount of tax
in the resulting cell. A taxpayer whose income is greater than $10,000
(SIT) .000 for 1975 only) or who itemizes his deductions must compute
his tax using the tax rates.
The present optional tax table set-up which provides a different
table for each number of exemptions claimed by the taxpayer in order
to provide for income of up to $10,000 has resulted in 6 pages of fine
print, representing 1:2 optional tax tables in the instructions accom-
panying the income tax return. The 1975 tables extending up to $15,000
of AGI cover 10 pages in the instructions. In addition, a separate
publication is required for taxpayers claiming 13 or more exemptions.
The Internal Revenue Service has stated that this has been a consid-
erable source of taxpayer error because taxpayers are not always sure
which table to use or, because of the necessarily small size of the print,
which is the proper tax figure to enter on their return.
The House bill (sec. 501) revises the optional tax tables for indi-
viduals so that taxpayers will use a simplified table. The new tables
would be based on taxable income instead of adjusted gross income
and, as a result, 4 tax tables would replace the ±2 existing optional
tax tables. This will make it possible to print the tax tables on two
pages. In addition, the tax tables would apply to taxable incomes up
to $20,000 (instead of $10,000 of adjusted gross income) and would
be available to taxpayer.- who itemize and to those who take the stand-
ard deduction. However, the new tax tables will require the taxpayers
to make two subtractions, one for their deductions (either standard or
itemized) and one for their personal exemptions.
The new tables would apply to taxable years beginning after De-
cember 31, 1975.
2. Alimony Payments
Under present law, a deduction for alimony may be taken as an
itemized deduction from adjusted gross income in the year paid in
arriving at taxable income. The recipient of alimony must include such
payments in his or her income and pay tax on them. Payments for the
support of a spouse which are not required by a divorce or separation
agreement and payments for the support of children are considered
normal living expenditures on the part of a taxpayer. Such expendi-
tures are not deductible and are not included in the income of the
It is argued that the splitting of income or assignment of income
through the payment of alimony is not properly treated under current
law since only an itemized deduction is allowed for alimony. The view
often expressed is that the payment of alimony should be taken into ac-
count in determining net income. Items taken into account in determin-
ing net income are generally treated as deductions in arriving at ad-
justed gross income, rather than as itemized deductions which usually
relate to personal expenses. As a deduction from gross income, the
alimony deduction would be available to taxpayers who elect the stand-
ard deduction as well as to those taxpayers who elect to itemize their
The House bill (sec. 502) moves the deduction of alimony payments
from an itemized deduction to a deduction from gross income in ar-
riving at adjusted gross income (sec. 62). The bill also makes a change
(sec. 3402 (m) (2)) Avhich includes the deduction for alimony as one
of the deductions taken into account for determining withholding al-
lowances in order to avoid overwithholding.
This provision is to apply to taxable years beginning after Decem-
ber 31, 1975.
3. Retirement Income Credit
Under present hiAV. individuals 65 years of age or over are eligible
for a tax credit based on the first $1,524 of retirement income. The
credit is 15 percent of this retirement income. Each spouse who is 65
or over may compute his tax credit on up to $1,521 of his own retire-
ment income. Alternatively, spouses 65 or over who file joint returns
may compute their credit on up to $2,286 of retirement income (one
and one-half times $1,524) even though one spouse received the entire
amount of the retirement income.
To be eligible for the credit an individual must have received more
than $600 of earned income in each of the prior 10 years. (A widow or
widower whose spouse had received such earned income is considered
to have met this earned income test).
Retirement income, for purposes of this credit, includes taxable
pensions and annuities, interest, rents, dividends, and interest on Gov-
ernment bonds issued especially for the self-employed setting aside
amounts under H.R. 10 or IRA retirement-type plans.
The maximum amount of retirement income an individual may
claim ($1,524. or $2,286 for married couples) must be reduced by two
broad categories of receipts. First, it must be reduced on a dollar-for-
dollar basis by the amount of social security, railroad retirement, or
other exempt pension income received by the taxpayer. Second, the
maximum amount of retirement income eligible for the credit is fur-
ther reduced by one-half of the annual amount of earned income over
$1,200 and under $1,700 and by the entire amount of earned income in
excess of $1,700. This reduction for earned income does not apply to
individuals who have reached age 72.
Individuals under age 65 also are eligible for tax credits for re-
tirement income but only with respect to pensions received under a
public retirement system. Only income from a pension, annuity, retire-
ment, or similar fund or system established by the United States, a
State, or a local government, qualifies under this provision. This re-
striction of retirement income for purposes of the credit to income
from a public retirement system applies only until the individual
reaches the age of 65; thereafter he is entitled to take the credit on the
same basis as other individuals who have reached that age.
Many believe that there is a need to redesign the present retirement
income credit. One reason often given is that the credit needs up-
dating. Most of the features of the present credit have not been
revised since 1062 when the maximum level of income on which the
credit is computed was set and when the current earnings liinits were
00- 54 1—76-
established. 1 Since then, there have been numerous revisions of the
social security law which substantially liberalized the social security
benefits. As a result, the present maximum amount of income eligible
for the credit is considerably below the average annual social security
primary benefit of $2,271 received by a retired worker and the average
social security primary and supplementary benefit of slightly over
$3,400 that could be received by a retired worker and his spouse (one
and a half times the primary benefit).
Often it is also claimed that the complexity of the present retire-
ment income credit prevents it from providing the full measure of
relief it was intended to grant to elderly people. Some of the organi-
zations representing retired people have estimated that as many as
one-half of all elderly individuals eligible to use the retirement in-
come credit do not claim this credit on their tax returns. It has been
suggested that this complexity stems from an attempt to pattern
the credit after the social security law. For example, to claim the
credit on his tax return, a taxpayer must show that he has met the
test of earning $600 a year for 10 years; he must also segregate his
retirement income from his other income; he must reduce the maxi-
mum amount of retirement income eligible for the credit by the
amount of his social security income and by specified portions of his
earned income under the work test ; a credit of one-half times the basic
credit is available for a man and his wife; and a credit is available
for each spouse separately if each spouse independently meets the
The purpose of all these provisions is to provide individuals who
receive little or no social security benefits the opportunity to receive
tax treatment roughly comparable to that accorded those who get
tax-exempt social security benefits. However, it is contended that the
result lias been to impose severe compliance burdens on large num-
bers of elderly people many of whom are not skillful in filing tax
returns. Such individuals now compute their retirement income credit
on a separate schedule, which fills an entire page in the tax return
naeket, with 19 separate items, some of which involve computations
in three separate columns (see the form shown below) .
Another argument sometimes made against the present retirement
income credit is that it discriminates among individuals with modest
incomes depending 1 on the source of their income. As indicated above,
the credit is available only to those with retirement income — that is,
some form of investment or pension income in the taxable year. It
is pointed out that elderly individuals who must support themselves
bv earning modest amounts and who have no investment or pension
income are not eligible for any relief under the present credit. This
has given rise to considerable criticism as to the fairness of the tax
law; many elderly individuals who rely entirely on earned income
maintain that they should be allowed the same retirement income
credit as those who live on investment income. Under the present
a Ono other feature of the credit was adopted in the 1964 Revenue Act. This
provision allowed spouses 65 and over who file joint returns to claim a credit on
up to $2,286 of retirement income (one and one-half times the $1,524 maximum
base for single people) even if one spouse receives the entire amount of the mar-
ried couple's retirement income.
credit, elderly people who rely entirely on earned income are required
to pay substantially higher taxes than individuals whose incomes
come from investments. Another criticism sometimes made is that
higher taxes on earnings than on retirement income serve as a
disincentive to work .
schedules EAR (Form 1040) 1975 Schedule R — Retirement Income Credit Computation
Name(s) as shown on Fain 1040 (Do not enter name and social security number if shown or. jther sids)
Your social security number
If you received earned income in excess of $600 in each of any 10 calendar years before 1975,
you may be entitled to a retirement income credit. If you elect to have the Service compute your
tax (see Form 1040 instructions, page 5), answer the question for columns A and B below and
fill in lines 2 and 5. The Service will figure your retirement income credit and allo.v it in com-
puting your tax. Be sure to attach Schedule R and write "RIC" on Fcrm 1040, line 17. If you
compute your own tax, fill out all applicable !:nes of this schedule.
Married residents of Community Property States see Schedule R instructions.
Joint return filers use column A for wife and column B far husband. All other filers
use column B only.
Did you receive earned income in excess of $500 in each of any 10 calendar years
before 1975? (Wijows or widowers see Scnedule R instructions.) If "Yes" in either
column, furnish all miormation below in that column. Abo furn>sh the combined
information ca!!ed for in column C for both husband and wife if joint return, both 65
or over, even if only one answered "Yes" in column A or B.
- Yes u No
□ Yes Z
1 Maximum amount of retirement income for credit computation
(a) Amounts received as pensions or annuities under the Social Security Act,
the Railroad Retirement Acts (but not supplemental annuities), and certain
other exclusions from gross income .
(b) Earned income received (does net apply to persons 72 or over):
(1) If you are under 62, enter the amount in excess of $900 ....
(2) If you are 62 or over but under 72, enter amount determined as follows:
if $1,200 or less, enter zero 1
if over $1,200 but not over $1,700, enter >/ 2 of amount over . L .
$1,200; or if over $1,700, enter excess over $1,450 ... J
3 Total of lines 2(a) and 2(b)
4 Balance (subtract line 3 from line 1)
If column A, B, or C is more than zero, complete this schedule. If ail of these
columns are zero or less, do nat file this schedule.
5 Retirement income:
(a) If you are under 65:
Enter only income received from pensions and annuities undsr public retire-
ment systems (e.g. Fed., State Govts., etc.) included or. Form 1040,
(b) If you are 65 or older:
Enter total of pensions and annuities, interest, dividends, proceeds of retire-
ment bonds, and amounts received from individual retirement accounts
and individual retirement annuities that are included on Form 1040, line
15, and gross rents from Scheaule E, Part II, column (b). Also include ycur
share of gross rents from partnerships and your proportionate share of
taxable rents from estates and trusts
6 Line 4 or line 5, whichever is smaller
7 (a) Total (add amounts on line 6, columns A and B)
(b) Amount from line 6, column C, if applicable
8 Tentative credit. Enter 15% of line 7(a) or 15% cf line 7(b), whichever is greater
9 Amount cf tax shewn on Form 1040, line 16c
10 Retirement income credit. Enter here and on Form 1040, line 48, the amount on line 8 or line 9, whichever is
smeller. Note: If you claim credit for foreign taxes or tax free covenant bonds, skip line 10 and complete lines 11,
. 12, and 13, below
11 Credit for foreign taxes or tax free covenant bends . .
12 Subtract line 11 from line S (if less than zero, enter zero)
13 Retirement income credit. Enter here and on Form 1040, line 48, the amount on line 8 or line 12, whichever
. ufria HJV-0-57S-:
The House bill (sec 503) restructures the present retirement in-
come credit and converts it to a L5-percent tax credit for the elderly,
available to all taxpayers a<re (^ or over regardless of whether they
have retirement income or earned income. The maximum amount on
which the credit is computed is increased to $2,500 for single persons
age @p or over (or for married couples filing joint returns where only
one spouse is age 65 or over) and to $3,750 for married couples filing
joint returns where both spouses are age 65 or over.
The reduction for earnings over $1,200 is eliminated but the reduc-
tion for social security benefits and other tax-exempt pension income
is retained. However, an income phaseout based on adjusted gross in-
come (rather than just earned income) above $7,500 for single per-
sons and $10,000 for married couples ($5,000 for a married person
filing a separate return) is provided to limit the benefits of the credit
to low- and middle-income elderly taxpayers.
An example of the type of form for taxpayers age 65 and over which
these changes make possible is shown below. The form requires the tax-
payer to select the appropriate amount on which to compute the credit
and to deduct from this amount his social security and certain other
tax-exempt income. It also requires the taxpayer to deduct adjusted
gross income above specified leA T els. The credit is computed on the bal-
ance at a 15-percent rate and is entered on the basic form 1040 as
a tax credit.
SCHEDULE R. — Credit for taxpayers age 65 and over
MAXIMUM AMOUNTS FOR CREDIT COMPUTATION
Then your maximum
amount for credit
If you are: (check one box) computation is —
□ Single $2, 500
□ Married filing jointly and only one spouse is 65 or over 2, 500
□ Married filing jointly, both age 65 or over 3, 750
□ Married filing a separate return and age 65 or over 1 F 875
1. Enter (from above) your maximum amount for credit computation....
2. Amounts received as pensions or annuities under the Social Security
Act, the Railroad Retirement Acts (but not supplemental annui-
ties) and certain other exclusions from gross income
3. Adjusted gross income reduction. Enter one-half of adjusted gross
income (line 15 form 1040) in excess of $7,500 if single; $10,000
if married filing jointly; or $5,000 married filing separately
4. Total of lines 2 and 3
5. Balance (subtract line 4 from line 1); if more than zero complete
this form; if zero or less, do not file this form
6. Amount of credit; enter (here and on form 1040, line 49) 15 percent
of line 5 but not more than the total income tax on form 1040,
Under this phaseout, the maximum amount on which the credit is
computed would be reduced by $1 for each $2 of adjusted gross income
( AGI.) abo ve the ind icated AGI levels.
In addition, the provisions of present law that limit the credit
based on the amount of a taxpayer's retirement income would be elim-
inated. Thus, the credit would also be allowed for earned income.
The requirement that to be eligible for the credit, the taxpayer must
have met the test of earning $600 a year for 10 years would be elimi-
nated. Further, the variation in treatment of married couples depend-
ing on whether they are separately eligible for the credit would be
Although the House bill generally retains present law for individ-
uals under age 05 receiving public retirement pensions, the maximum
amount on which the credit may be computed for those individuals
would be increased to $*2.50i) for single persons and S3. 750 for married
couples. Also, for individuals under age 05. the 10-year $600 earnings
requirement and the variation in treatment of married couples would
be eliminated. In cases where one spouse is eligible for the new credit
and the other is eligible for the public retiree credit, the couple must
elect to claim only one of those two credits.
This provision would apply to taxable years beginning after De-
cember 31, 1975.
4. Credit for Child Care Expenses
Under present law, taxpayers are permitted an itemized deduction
for expenses for the care of a dependent child, incapacitated depend-
ent or spouse, or for household services when the taxpayer maintains
a household for any of these qualifying individuals. An eligible de-
pendent child must be under age 15 and the taxpayer must be able to
claim a personal exemption for him. These expenses must be related to
employment ; that is, they must be incurred to enable the taxpayer to
be gainfully employed.
Eligible expenditures are limited to a maximum of $400 a month.
Services provided for children outside the taxpayer's home are further
limited to $200 a month for one dependent, $300 for two, and $400 for
three or more. (No deduction is allowed for the care of an incapaci-
tated dependent over age 14 or spouse outside the taxpayer's home.)
The amount of the eligible expenses which may be deducted is also
reduced bv one-half of adjusted gross income in excess of $35,000 a
year for 1976 and thereafter ($18,000 prior to 1976). x No deduction is
allowed, however, for payments to relatives.
To claim this deduction, a husband and wife must generally file a
joint return. Both must be employed substantially full time, that is,
three-quarters or more of the normal or customary workweek or the
equivalent on the average. However, a spouse who has been deserted
for an entire year may be able to file as a single person.
In the case of a disabled dependent, the deductible expenses are re-
duced by the dependents' adjusted gross income plus disability income
in excess of $750.
It has been argued that the availability of the child and dependent
care deduction under present law (sec. 214) is unduly restricted by its
classification as an itemized deduction and by its complexity.
It is pointed out that treating child care expenses as itemized de-
ductions denies any beneficial tax recognition of such expenses to tax-
payers who elect the standard deduction. Many believe that such ex-
penses should be viewed as a cost of earning income for which all
working taxpayers may make a claim. One method for extending the
allowance of child care expenses to all taxpayers, and not just to item-
izers, would be to replace the itemized deduction with a deduction from
gross income in arriving at adjusted gross income as is done with other
costs of earning income. Alternatively, a credit could be allowed against
income tax liability for a percentage of qualified expenses. While de-
ductions and exclusions favor taxpayers in the higher marginal tax
1 This change was made in the Tax Reduction Act of 1075.
brackets, a tax credit provides more help for taxpayers in the lower
brackets and provides the same degree of relief for taxpayers in the
lower income brackets as for those m higher tax brackets at a smaller
Another concern expressed with the present provisions is that be-
cause there is a $400 a month limit on the deduction under present law.
a complex child care deduction form is necessary. It has been suggested
that the child care allowance could be made simpler and the need for a
separate form eliminated if it were computed on an annual instead of
a monthly basis. Many also believe that additional, unnecessary com-
plications result from the distinction between expenses for children
incurred inside and outside the home and from the requirement that
the allowable deductions be reduced by the dependent's disability in-
come. It is pointed out that allowing the same amount for the expenses
of caring for chidren whether inside or outside the home and replacing
the $200, $300 and $400 monthly maximum deductions for such outside
expenses for the care of one, two, or three children, with annual ceil-
ings based on one and two or more dependents, would further reduce
the complexity of the provision.
Questions have also been raised as to the appropriateness of the
rule allowing the deduction in the case of joint returns only where
both spouses work full time. The full-time earnings test was intended
to prevent one spouse from working part time, perhaps in a nominal
capacity, in order to obtain the benefits of a deduction which could
amount to $4,800 a year. However, it has been suggested that this type
of abuse could be prevented by an alternative rule limiting the allow-
able expenses to the earnings of the spouse with the smaller earnings.
It has also been suggested that child care expenses should be allowed
when one spouse works and the other is a full-time student. It is
pointed out that the spouse attending school cannot reasonably be
expected to provide child care to enable the other spouse to work.
In these circumstances, it is contended that the expenses incurred to
pay for child care are, in .fact, necessary for the taxpayer to be gain-
Others have suggested that the one-year waiting period before a
deserted spouse may claim child care expenses is too long and believe
that a shorter qualifying period to mitigate hardships would be
Problems have also arisen as a result of limiting the deduction
of child care expenses to parents who claini a child as a dependent.
It is noted that this denies the deduction to a divorced or separated
parent with custody of a child, who does not supply more than half
of the child's support and cannot claim the child as a dependent,
but who may nevertheless incur child care expenses in order to work.
It is argued that the parent who has custody of the child for the
greater period of the year should be allowed to treat the child care
expenses as a cost of earning income, provided the parent who has
custody for the shorter period does not claim these expenses.
Suggestions were also made that the bar on deducting payments
to relatives for the care of children is overlv restrictive.
Others view qualified child care expenses as a cost of earning income
and believes that an income ceiling on those entitled to the allowance
has minimal revenue impact, if the allowance is in the form of a credit.
Therefore, it was argued that it is appropriate and feasible to elimi-
nate the income phaseout and to allow all taxpa}~ers to claim such
expenses regardless of their income level.
House J) 'til
The House bill (sec. 504) would replace the itemized deduction for
household and dependent care expenses with a nonrefundable tax
credit. The tax credit would equal 20 percent of the employment-
related expenses incurred for the care of a child under age 15 or an
incapacitated adult, in order to enable the taxpayer to work. The
amount of employment-related expenses which may be taken into
account would be limited to $2,000 for one dependent and $4,000 for
two or more dependents. The income threshold of $35,000 over which
the deduction is phased out would be eliminated.
The income tax return would be simplified by eliminating the need
for a separate child care schedule. The present monthly maximum
deduction ($200 for one dependent, $300 for two dependents and $400
for three or more dependents) would be replaced by the maximum
annual credit of $400 for one dependent and $800 for two or more.
The credit would be extended to married couples in which the hus-
band or wife, or both, work part time. (Presently, both are required
to work full time.) The eligible expenses would be limited to the
amount of earnings of the spouse earning the smaller amount, or in
the case of a single person, to his or her earnings. The credit would
also be available to married couples where one spouse is a full-time
student and the other spouse works. The credit would be extended to
a divorced or separated parent who has custody of a child even though
the parent may not be entitled to a dependency exemption for the
child. A deserted spouse would be eligible for the credit when the
deserting spouse is absent for 6 months instead of an entire year. In
addition, the distinction between care in the home and care outside the
home would be eliminated. The requirement that the provision for
the taxpayer be reduced by disability income received by his dependent
would be eliminated. Finally, payments for services rendered by cer-
tain individuals who may be related to the taxpayer would be eligible
for the credit if the related individual is not a resident of the same
household as the taxpayer and if the related individual is not a de-
pendent of the taxpayer or his spouse, provided such services consti-
tute employment covered by the Social Security Act.
These changes would appply to taxable years beginning after De-
cember 31, 1975.
5. Sick Pay and Certain Military, etc. Disability Pensions
Under present law, gross income does not include amounts received
under wage continuation plans when an employee is absent from work
on account of personal injuries or sickness. The payments that are re-
ceived when an employee is absent from work are generally referred
to as sick pay ( under sec. 105 (d) ) .
The proportion of salary covered by the wage continuation pay-
ments and any hospitalization of the taxpayer determines whether or
tiOt there is a waiting period before the exclusion applies. If the sick
pay is more than 75 percent of the regular weekly rate, the waiting pe-
riod before the exclusion is available is 30 days whether or not the tax-
payer is hospitalized during the period. If the rate of sick pay is to
percent or less of the regular weekly rate and the taxpayer i» not hos-
pitalized during the period, the waiting period is 7 days. If the sick
pay is 77> percent or less of the regular weekly rate and the taxpayer
was hospitalized for at least 1 day during the period, there is no wait-
ing period and the sick pay exclusion applies immediately. In no case
may the amount of sick pay exceed S75 a week for the first 30 days
and $100 a week after the first 30 days.
During the period that a retired employee is entitled to the sick pay
exclusion, he may not recover any of his contributions toward any
annuity under section 7:2. x
Section 105(d) which provides the exclusion for sick pay is ex-
tremely complex. The provision's complexity requires a separate 28-
line tax form which is sufficiently difficult that many taxpayers must
obtain professional assistance in order to complete it and avail them-
selves of the exclusion. Many believe that elimination of the complexity
in this area is imperative.
In addition, it is argued that the present sick pay provision causes
some inequities in the tax treatment of sick employees compared To
working one- and the treatment of lower-income taxpayers compared to
those with higher incomes. The argument is made that excluding sick
pay payments (received in lien of wages) from income when an em-
ployee is absent from work, while taxing the same payments if made as
wage- while he is at work, is not justified. .V working employee gen-
erally incurs some costs of earning income not incurred by a si<$k
employee who stays at home. The latter may incur additional medical
expenses on account of his sickness; but he may deduct such expens es
as medical expenses if they exceed the percentage of income
a Reg. sec. 1.72-15 (b) and (c)(2).
f,0-.-)41— 7fi 3
Under present law, low- and middle-income taxpayers receive, on a
percentage basis, less benefit from the sick pay exclusion than do tax-
payers in higher marginal tax brackets because of the progressivity of
tax rates. As a result, more than 60 percent of the benefits from this
provision currently goes to taxpayers with adjusted gross incomes
plus sick pay over $20,000. Taxpayers who receive no sick pay, of
course, receive no benefit at all. It is argued that the exclusion allowed
by section 105 should not have a regressive effect and that the pro-
vision should be amended to direct a fairer share of its tax benefits to
low- and middle-income taxpayers.
The House bill (sec. 505) significantly revised the sick pay exclu-
sion provision and the treatment of military disability payments for
future members of the armed services. The present sick pay exclusion
which involves complicated time and percentage rules would be re-
pealed. A maximum annual exclusion of $5,200 ($100 a week) would
be provided for taxpayers under age 65 who are permanently and
totally disabled. (After that age, these individuals will be eligible for
the revised elderly credit.) However, the revised sick pay exclusion
is to be reduced on a dollar-for-dollar basis by the taxpayer's income
(including disability income) in excess of $15,000. These new rules
would apply to both civilian and military personnel.
The sick pay revisions would apply to civilians and military per-
sonnel with respect to taxable years beginning after December 31,
Disability Pensions of the Military, etc.
Present law excludes from gross income amounts received as a pen-
sion, annuity, or similar allowance for personal injuries or sickness
resulting from active service in the armed forces of any country, as
well as similar amounts received by disabled members of the National
Oceanic and Atmospheric Administration (NCAA, formerly called
the Coast and Geodetic Survey), the Public Health Service, or the
Foreign Service (sec. 104(a) (4)). 1 In addition, payments of benefits
under any law administered by the Veterans' Administration are ex-
cludable from gross income (section 3101(a) of Title 38 of the United
States Code). Thus, disability benefits administered by the Veterans'
Administration are exempt from tax under present law.
Concern has been expressed about two somewhat conflicting aspects
of the exclusion of disability payments from gross income: on the one
hand, the abuse of the exclusion in certain instances, particularly by
retiring members of the armed forces, and on the other hand, the ex-
pectation and reliance of present members of the affected government
services, especially the armed forces, on the government benefit avail-
1 Under present regulations (Reg. sec. 1.105 — 4(a) (3) (i) (a) ), the portion of
a disability pension received by a retired member of the armed forces which is
in excess of the amount excludable under section 104(a) (4) is excluded as sick
pay under a wage continuation plan subject to the limits of section 105(d) if
such pay is received before the member reaches retirement age.
able to them when they entered government employment or enlisted
in or were drafted into the military.
Criticism of the exclusion of armed forces disability pensions from
income focuses on a number of cases involving the disability retire-
ment of military personnel. In many cases, armed forces personnel
have been classified as disabled for military service shortly before
they would have become eligible for retirement principally to obtain
the* benefits of the special tax exclusion on the disability portion of
their retirement pay. In most of these cases the individuals, having
retired from the military, earn income from other employment while
receiving tax-free ''disability" payments from the military. Many
question the equity of allowing retired military personnel to exclude
the payments which they receive as tax-exempt disability income when
they are able to earn substantial amounts of income from civilian
work, despite disabilities such as high blood pressure, arthritis, etc.
However, in order to provide benefits to any present personnel who
may have joined or continued in the government or armed services
in reliance on possible tax benefits from this provision, many believe
any changes in the tax treatment of military disability payments
should affect only future members of the armed forces, XOAA, Public
Health Service and Foreign Service.
The changes in the tax treatment of military disability payments
would only affect payments made to members of the armed services
who enlist after September 24, 1975. At all times, Veterans' Adminis-
tration disability payments will continue to be excluded from gross
income. In addition, even if a military retiree does not receive his dis-
ability benefits from the Veterans' Administration, he would still be
allowed to exclude from his gross income an amount equal to the
benefits he could otherwise receive from the Veterans' Administration.
Otherwise future members of the armed services would be allowed to
exclude military disability retirement payments from their gross in-
come only if the payments are directly related to combat injuries. A
combat-related injury is defined to be an injury or sickness which is
incurred (1) as a direct result of armed conflict; (2) while engaged in
extrahazardous service: (3) under conditions simulating war; or (4)
which is caused by an instrumentality of war.
All persons who were members of the armed services or military
retirees as of September 24, 1975, and who received or will receive
military disability retirement payments which are excluded from
gross income under present lav,-, will continue to exclude such pay-
ments from gross income.
The military disability revisions would apply to individuals who
enter the armed services on or after September 25, 1975.
6. Moving Expenses
An employee or self-employed individual may claim a deduction
from gross income for the expenses of moving to a new residence in
connection with beginning work at a new location (sec. 217). Any
amount received directly or indirectly as a reimbursement of moving
expenses must be included in a taxpayer's gross income as compensa-
tion for services (sec. 82). but he may offset this income by deducting
expenses which would otherwise qualify as deductible items.
Deductible moving expenses are the expenses of transporting the
taypayer and members of his household, as well as his household goods
and personal effects, from the old to the new residence; the cost of
meals and lodging enroute : the expenses for premove househunting
trips ; temporary living expenses for up to 30 days at the new job loca-
tion : and certain expenses related to the sale or settlement of a lease
on the old residence and the purchase of a new one at the new job
The moving expense deduction is subject to a number of limitations.
A maximum of $1,000 may be deducted for premove househunting
and temporary living expenses at the new job location. A maximum
of $2,500 (reduced by any deduction claimed for househunting or
temporary living expenses) may be deducted for certain qualified
expenses for the sale and purchase of a residence or settlement of a
lease. If both a husband and wife begin new jobs in the same general
location, the move is treated as a single commencement of work. If a
husband and wife file separate returns, the maximum deductible
amounts are halved.
In order for a taxpayer to claim a moving expense deduction, his
new principal place of work must be at least 50 miles farther from his
former residence than was his former principal place of work (or his
former residence, if he had no former place of work) .
During the 12-month period following his move, the taxpayer must
be a full-time employee in the new general location for at least three-
fourths of the following year, that is, 39 weeks during the next 12-
month period. A self-employed person must, during "the 24-month
period following his arrival at his new work location, perform services
on a full-time basis for at least 78 weeks, with at least 39 weeks of
full-time work falling within the first 12 months. Even if the 39- or
78-week requirement has not been fulfilled at the end of a taxable
year (but may still be fulfilled), the taxpayer may elect to deduct
any qualified moving expenses which he has paid or incurred provided
he has met all the other requirements. If he fails to meet the full-time
employment period requirements in a subsequent taxable year, he must
include the amounts previously deducted in his gross income for the
subsequent year. 1
lr The 30- and 78-week tests are waived if the employee is unable to satisfy
them as a result of death, disability, or involuntary separation (other than for
The provisions for moving expenses reflect significant revisions
made by the Tax Reform Act of 1969. Since 1969, the dollar limitations
have been criticized, particularly by persons suggesting dollar adjust-
ments to reflect inflation.
Proponents of simplification have urged that a single dollar limit be
adopted instead of the $1,000 and $2,500 tests ; that the 39- and 78-week
rules be replaced by a general rule allowing the taxpayer to obtain
work within two years in the new location or at a third location, if
necessary. Instead of the allowance of 30 days' temporary living ex-
penses at the new place of work, some would substitute a deduction for
such expenses whether incurred at the former place of work, or enroute
to or at the new place for a continuous 30 or 45 day period in the
process of moving. Both employee and employer tax recordkeeping
might be reduced, if the reimbursements for expenses which are de-
ductible by the employee are not required to be included in the em-
ployee's gross income, provided the employee provides the employer
with documentation of his expenses.
One suggestion for changing the $2,500 maximum on qualified ex-
penses for the sale or purchase of a residence would replace the dollar
limit with a deduction based on a percentage of the taxpayer's sales
price in order to reflect inflation in real estate selling commissions.
Some argue that the 50-mile test restricts the deduction of expenses
to a move to a new job location which is 50 miles farther from the tax-
payer's former residence than was former principal place of work (or
liis former residence if he had no former place of work.) If a taxpay-
er's former residence was 30 miles from his former job, his new job
location must be at least 50 miles farther from his former residence,
that is, a total of at least 80 miles farther, if his moving expenses are to
be deductible. In view of the increasing cost of commuting, the grow-
ing concern for gasoline conservation, and the continuing inadequacy
of mass transportation in most areas of the country. It is urged that
there be some reduction of the 50-mile test.
It has been indicated that certain changes made in the 1069 Act
created unforeseen difficulties for the military. The Department of
Defense and the Department of Transportation (with respect to the
peacetime Coast Guard) have no procedure for identifying or valuing
the in-kind reimbursements provided for each serviceman where the
military pays a mover for the moving expenses, or does the moving
itself. The Department of Defense, acting on behalf of all the services,
indicated in discussions with the Internal Revenue Service that estab-
lishing such a system for identifying reimbursed moving expenses
would involve substantial administrative burdens for the Department,
as well as increasing its expenses, at no revenue gain to the Treasury.
A- a result of these administrative problems, the Internal Revenue
Service in 1071 agreed to a moratorium for the reporting and reim-
bursement rules (except for cash reimbursements) in the case of the
military. The Service extended this administrative moratorium through
1072 and 107:>. In 1074 the armed forces were exempted from these
requirements by legislation - effective through December 31, 1075.
»P.L. 03-400. see. 2. 88 Stat. 1-100. 93rd Cons'., 2d Sees., October 20. 1074.
Pursuant to this statutory authorization, the Secretary of the Treas-
ury entered into agreements with the Secretary of Defense for members
of the Army, Xavy, and Air Force, and with the Secretary of Trans-
portation for members of the Coast Guard to allow special treatment
for servicemen's moving expenses for taxable vears ending before Jan-
uary 1, 1976.
As a result, the Secretaries of Defense and of Transportation were
not required to report or withhold tax on moving expense reimburse-
ments made to members of the armed forces, nor were members of the
armed forces required to include in income the value of in-kind moving
services provided by the military. However, members of the armed
forces could deduct moving expenses to the extent they exceed mili-
tary reimbursements, and would otherwise qualify as deductible ex-
penditures under section 217, without counting any military in-kind
reimbursements against the dollar limitations.
As a result of the expiration of the moratorium legislation, the
military will be required to devise complex and expensive adminis-
trative procedures because it is now required to report and withhold
tax on reimbursed in-kind moving expenses and servicemen are re-
quired to include such reimbursements in income.
In addition, the military has found the 50-mile limitation and the
39- week rule a hardship for military personnel because many manda-
tory personnel moves are for less than 39 weeks and for less than 50
The House bill (sec. 506) modifies the present treatment of job-
related moving expenses in a number of respects. The bill increases the
$1000 maximum deduction for premove househunting and temporary
living expenses at the new job location from $1000 to $1500 and
increases from $2500 to $3000 the maximum deduction for qualified
expenses for the sale, purchase or lease of a residence (reduced by any
deduction claimed for premove househunting or temporary living
expenses). As with the existing limitations, the new amounts are
halved if a husband and wife file separate returns. The bill also re-
duces the 50-mile rule to 35 miles.
Several exemptions are provided for the Department of Defense, the
Department of Transportation and members of the armed forces of
the United States on active duty. The departments and servicemen are
not required to report as income to the servicemen, nor to withhold
tax on, any in-kind moving expenses provided by the military for
moves pursuant to a military order and incident to a permanent change
of station for which a change of residence is required. Members of the
armed forces may. however, deduct any qualified moving expenses
subject to the generally applicable dollar limitations to the extent such
expenses exceed authorized in-kind military reimbursements without
reducing the dollar limitations by the amount of any in-kind reim-
bursements provided by the military.
The House bill also exempts members of the armed forces from
the 35-mile limitation and from the 39-week rule in the case of re-
quired moves incident to a permanent change of station when the
military authorizes in-kind moving expense reimbursements.
The provision in the House bill is to apply to taxable years beginning
after December 31, 1975.
7. Accumulation Trusts
A trust is generally treated as a separate entity which is taxed in the
same manner as an individual. However, there is one important dif-
ference : the trust is allowed a special deduction for any distributions
of ordinary income to beneficiaries. The beneficiaries then include these
distributions in their income for tax purposes. Thus, in the case of in-
come distributed currently, the trust is treated as a conduit through
which income passes to the beneficiaries, and the income so distributed
retains the same character in the hands of the beneficiary as it possessed
in the hands of the trust.
If a grantor creates a trust under which the trustee is either re-
quired, or is given discretion, to accumulate the income for the benefit
of designated beneficiaries, however, then, to the extent the income is
accumulated, it is taxed at individual rates to the trust. An important
factor in the trustee's (or grantor's) decision to accumulate the income
may be the fact that the beneficiaries are in higher tax brackets than
Present law provides that beneficiaries arc taxed on distributions
received from accumulation trusts in substantially the same manner
as if the income had been distributed to the beneficiary currently as
earned, instead of being accumulated in the trust.
This is referred to as the throwback rule under which distributions
of accumulated income to beneficiaries are thrown back to the year in
which they would have been taxed to the beneficiary if they had been
distributed currently. The Tax Reform Act of 1969 revised the prior
throwback rule to provide an unlimited throwback rule with respect to
The tax on accumulation distributions is computed in either of two
ways. One method is the "exact*' method, and the other is a "shortcut"'
method which does not require the more extensive computations re-
quired By the exact method. Under the exact method of computation,
the tax on the amounts distributed cannot exceed the aggregate of the
taxes that would have been payable if the distributions had actually
been made in the prior years when earned. This method requires com-
plete trust and beneficiary records for all past years, so that the dis-
tributable net income of the trust and the taxes of the beneficiary can
be determined for each year. The beneficiary's own fax then is recom-
puted for these years, including in his income the appropriate amount
of trust income for each of the years (including his share of any tax
paid by the trust). Against the additional tax computed in this man-
ner, the beneficiary is allowed a credit for his share of the taxes paid
bv the trust during his life. Any remaining tax then is due and pay-
able as apart of the tax for the current year in which the distribution
The so-callecl shortcut method in effect averages the tax attributable
to the distribution over a number of years equal to the number of years
over which the income was earned by the trust. This is accomplished
by including, for purposes of tentative computations, a fraction of the
income received from the trust in the beneficiary's income for each
of the 3 immediately prior years. The fraction of the income included
in each of these years is based upon the number of years in which the
income was accumulated by the trust.
Capital gain throwback rule. — Present law provides an unlimited
throwback rule for capital gains allocated to the corpus of an accumu-
lation trust. This provision does not apply to "simple trusts'' (any
trust which is required by the terms of its governing instrument to
distribute all of its income currently) or any other trusts, which in
fact distribute all their income currently, until the first year they
accumulate income. For purposes of this provision, a capital gains dis-
tribution is deemed to have been made only when the distribution is
greater than all of the accumulated ordinary income. If the trust has
no accumulated ordinary income or capital gains, or if the distribution
is greater than the ordinary income or capital gain accumulations, then
to this extent it is considered a distribution of corpus and no additional
tax is imposed.
It is agreed that the progressive tax rate structure for individuals is
avoided if a grantor creates a trust to accumulate income taxed at low
rates, and the income in turn is distributed at a future date with little
or no additional tax being paid by the beneficiary, even when he is in
a high tax bracket. This result occurs because the trust itself is taxed
on the accumulated income rather than the grantor or the beneficiary.
The throwback rule (as amended by the Tax Reform Act of 1969)
theoretically prevents this result by taxing beneficiaries on distribu-
tions they receive from accumulation trusts in substantially the same
manner as if the income had been distributed to the beneficiaries cur-
rently as it was earned. The 1969 act made a number of significant
revisions in the treatment of accumulation trusts. In applying the
throwback rule to beneficiaries with respect to the accumulation distri-
butions they receive, the act provided two alternative methods, as in-
dicated above, the exact method and the shortcut method. It is con-
tended that a number of administrative problems have resulted in the
application of these alternative methods for both the Internal Revenue
Service and the beneficiaries.
For example, trustees are under an obligation to the beneficiaries
of the trust to compute the throwback under the rule which results
in the least tax: thus, the short-cut method, which was intended to
simplify calculations and eliminate recordkeeping problems involved
with the exact method has not achieved this result because trustees
must compute the tax under both methods. As a result, it is contended
that it would be more desirable to have one simplified method rather
than having two alternative methods in applying the throwback rule.
In addition, a number of questions have been raised as to whether
the capital gains throwback rule, which was enacted in the 1969 act.
presents more complexity in its application than is warranted by the
concerns raised in 1969 with respect to capital gains. It is contended
that it would be more appropriate for the capital gains throwback rule
to be repealed and instead a rule provided to deal more directly with
the transferring of appreciated assets by grantors into trusts. Other
concerns have been raised with respect to other modifications dealing
with accumulation trusts, such as. the treatment of minors, the election
of simple trust treatment for a year in which all income is to be paid
out currently, and certain other technical modifications of the trust
Under the House bill (sec. 701). a single method, a revision of the
present "short-cut" method, would be substituted for the two alterna-
tive methods used in computing the throwback rule for accumulation
distributions. This method throws the average accumulation distribu-
tions (as determined under present law) back to the 5 preceding years
of the beneficiary (rather than the 3 preceding years under present
law). However, with respect to these 5 preceding years, the year with
the highest expanded taxable income and the year with the lowest
would not be considered (in effect, the computation of the additional
tax on the accumulation distribution under this short cut method would
continue to be based on a 3-year average basis). The average amount
for the 3 years would be added to the beneficiary's taxable income for
these years (rather than requiring the recomputation of his tax returns
as under present law). In other respects, the present rules under the
short cut method would continue to be applicable, except that no re-
funds would be available.
Income accumulated by a trust prior to the beneficiary's attaining
the age of 21 and the years a beneficiary was not in existence would not
be subject to the throwback rule. A special rule would be provided for
three or more trusts which accumulate income in the same year for a
The House bill repeals the capital gains throwback rule. A special
rule would be provided to cover the possible tax abuse where the
grantor places in trust property which has unrealized appreciation in
order to shift the payment of tax to the trust at its lower progressive
rate structure. In this case, the property would have a new 2-year hold-
ing period which would apply to the unrealized appreciation in the
property at the time it is placed in trust. The appreciation in the prop-
erty during the time it is held in trust would come under the normal
holding period rules. This special rule would not apply to property
placed in charitable remainder trusts or pooled income funds.
These changes would apply to accumulation distributions made in
taxable years beginning after December 31. 1974.
UNIVERSITY OF FLORIDA
3 1262 07125 7579